Greetings and welcome to the Bright Horizons Family Solutions Fourth Quarter 2018 Earnings Release Conference Call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. [Operator Instructions] As a reminder, this conference is being recorded. I would now like to turn the conference over to your host Elizabeth Boland, Chief Financial Officer. Please go ahead.

Thanks, Hector and hello to everybody on the call today from snowy Boston. With me on the call are Stephen Kramer, our Chief Executive Officer; and Dave Lissy, our Executive Chair. And before I turn it over to Stephen, let me cover off a few administrative matters. As mentioned, today’s call is being webcast and the recording will be available under the Investor Relations section of our website at brighthorizons.com. As a reminder to participants on the call, any forward-looking statements made on this call including those regarding future financial performance are subject to the Safe Harbor statement that’s included in our earnings release. Forward-looking statements inherently involve risks and uncertainties that may cause actual operating and financial results to differ materially and are described in detail in our 2017 Form 10-K. Any forward-looking statement speaks only as of the date on which it’s made and we undertake no obligation to update any forward-looking statements. Also we refer today to non-GAAP financial measures which are detailed and reconciled to their GAAP counterparts in our earnings release, which is also available under the IR section of our website. Now, let me turn it over to Stephen for the review and update on the business. Stephen?

Great. Thanks, Elizabeth and again thanks to all of you who have joined us this evening. On today’s call, I will review our financial and operating results for this past quarter and the full year 2018 and update you on our growth plans and outlook for 2019. Elizabeth will then follow with a more detailed review of the numbers before we open it up for your questions. We are very pleased to continue our solid performance in the fourth quarter of 2018 and it sets us up well to drive continued growth across all of our business segments in 2019 and beyond. For the quarter, revenue grew 9% to $478 million and adjusted EPS increased 23% to $0.90. In our full service center segment, we added 15 centers, including new client centers for Colgate-Palmolive and Cambridge University as well as additional centers for Penn State and the Mayo Clinic. We also completed two high-quality tuck-in acquisitions in the quarter one in the UK and one in the Netherlands. We also continued to expand our backup and education advisory client base with recent new client launches for Hilton Worldwide, Samsung, Ocean Spray and Kettering Health. In addition, Children’s Hospital Health System and HP represent cross-sells of existing clients to our backup and educational advisory services. These recent additions are great examples of the more than 250 of our employer clients, who purchased more than one of our services. We continue to be very excited about these cross-selling successes and the significant untapped opportunity with the rest of our client base. As we focus on selling the full suite of services to new and existing clients, we officially unveiled our modernized logo and collection of brands that tie each of our services directly to the Bright Horizons trade name and mark. We…

Thank you, Stephen. Once again recapping the headlines for the fourth quarter of 2018, overall revenue was up 9% or $38 million in the quarter. The 8% growth in full service center revenue around $30 million was driven by rate increases, enrollment gains and contributions from new centers, including about 2% from acquisitions. FX impact was a slight headwind to full service growth for the quarter, approximately 80 basis points. New client launches and expanded utilization by existing clients, helped drive 9% revenue growth in backup and 19% growth in Ed advisory services. In Q4, gross profit increased $12.5 million to $121 million or 25.2% of revenue and adjusted operating income increased to $63.7 million or 13.3% of revenue, as Stephen mentioned, up 110 basis points from Q4 of 2017. In our full service segment, adjusted operating income expanded 50 basis points to 9.2% on gains from enrollment growth in our mature and ramping centers from contributions from our new and acquired centers and from tuition increases. Both of the backup and Ed advisory segments reported operating income margins over 30% in the quarter on strong utilization levels, continued scale in these operations and improving efficiency of service delivery. Interest expense of $12 million in Q4 of ‘18 was up slightly over 2017 as incremental revolver borrowings to finance acquisitions and share repurchases was offset by lower average interest rates. Our current borrowing cost approximates 4% with $500 million of our term loans fixed with an interest rate swap. We ended the quarter at 3.25 turns of net debt to EBITDA. Our structural tax rate for 2018 on adjusted net income came in at 21% lower than our previous estimate due primarily to a reduction in the effective tax rate on our foreign earnings. With our improved operating performance and…

Thank you. At this time, we will be conducting a question-and-answer session. [Operator Instructions] Our first question comes from the line of Andrew Steinerman with JPMorgan. Please proceed with your question.

Hi, good evening. This is Michael Cho for Andrew. My first question is just around the margin this past quarter around in backup it was quite an improvement year-over-year. I mean and I know you called out scale and investments, but I was wondering if you can provide a little bit more color behind the margin profile and backup?

Yes. So, we have as mentioned on prior calls Mike we have got some variability that can occur in both the backup and Ed advising business based on levels of utilization. And so there is a fairly strong utilization time period in the fourth quarter with holidays. And so that’s the main driver is down to the good levels of use that we had and some of our clients are per use clients and so that use is incremental to the performance. And as a result we are seeing that on the top line. And then on the bottom line, I do think that we are – it’s too soon to have seen all of the efficiencies of some of the investments that we are making on that technology and user experience, but we are beginning to gain from some of the automation of the reservation process and the matching of service. We are seeing some efficiency that is coming into the cost structure. So at the margin it all contributes.

Understood. Thanks. If I could just ask a quick follow-up on the tech investments, I mean and I know Stephen had a bit of color around investments in your prepared remarks, but I understand kind of just looking for matching and efficiencies. But can you give a little bit more insight into kind of what has actually been the benefit and what’s actually expected over the near and medium term from these past tech investments? Thanks.

Sure. So, the tech investments as you will know are really focused on driving additional use as well as user experience. And so on the driving additional use side I think we have shown some really good progress as it relates to first engaging more users within a particular employers’ client base. So, increasing the numbers of individuals that are registered to use and then ultimately putting them on personalized journeys that allow us to communicate to them when we perceive they may have a need and allowing them to then react to that communication. And so from a marketing perspective, I think we feel really good about the progress that we are making in that regard both from creating more registrations as well as creating more reservations. On the user experience side, certainly we see great user experience enhancements across all the lines of service, but probably the one that is most significant is in the backup area and very specifically around the ability for an end-user to instantly book care. And so that is really creating connectivity between the end user and the supply that we have. And so it makes it a frictionless process for them to put in a reservation and ultimately get an instant care confirmation. And so what that does for the user is it eliminates any of the lag time that there is around, whether or not and who is going to serve that care. And then secondly from an efficiency standpoint, it eliminates some of the cost associated with what had previously been an interaction with the contact center. So again, I think that from both the marketing perspective as well as from a user experience perspective, we’re seeing good strides. And obviously the impact is both at the top line as well as from a cost structure perspective.

Great. Thank you.

Our next question comes from the line of Manav Patnaik with Barclays. Please proceed with your question.

Hi. This is Ryan Leonard filling in for Manav. Just a question on the cost in the quarter, I guess adjusted EBITDA came in a little bit light relative to our expectations. Were there any costs associated with either the rebranding that you mentioned or maybe some of these college programs you’re rolling out for employees?

Sorry Ryan I wasn’t able to quite hear you. You said with respect to the cost in the quarter?

Yes. I think costs were a little bit higher than we had expected. And I was just wondering if there’s any onetime things to call out whether it’d be some of the rebranding or some of the education, you’re providing for associates that that had any impact that we should be aware of?

Well we’ve had really good I’d say on the education program what we’re really pleased about is we’ve had very good a take up on the what we’re calling the Horizons Teacher’s Degree Program and have had a very good level of interest. And so there is a modest cost associated with that. I think it’s absorbable in our overall structure. So, I’m not calling that out as an unusual cost. We have had a really positive response to it. Likewise, the branding, we’re excited about what it’s going to bring in and it involved some level of cost, but not something that’s unusual or outsize. So, I don’t think we have anything to call out particularly on the cost front, no.

Okay, fair enough. And then just a quick one if I could on the buyback. How should we think of the pace of that? Or I guess what’s assumed in guidance or how do you think of it, kind of strategically on your end?

Yes. I mean our view is we have a very predictable cash flow generation business of course. And so, as I mentioned in the prepared remarks, we are expecting to have free cash flow well north of $250 million. And so, to the extent that we can identify growth opportunities be they acquisitions. We do tuck-in acquisitions as a matter of course. Those are part of our standard plan, if you will. So that is part of our guidance. But an outsize acquisition should that come along, that would be an opportunity for us to deploy more of that cash. We have $100 million-or-so that we’re investing in new centers that we’re developing and in maintenance capital. But that still leaves a level of cash flow that is predictable from year-to-year and replenishing year-to-year that we would be looking to continue to be active with a repurchase program. So, it the plan considers regular borrowing, but we’re not really signaling exactly what that is. We have a $300 million program that’s authorized. We’ve been regular buyers in the open market and now that Bain exited their position earlier in 2018 those larger blocks added to the volume a bit, but we would continue to be active.

And Ryan just doubling back to your original assertion around cost, I would just observe that we feel really good about the 110 basis point improvement. So not really clear what you’re referencing on the cost side. But again, we’re really pleased with the performance both from revenue and cost perspective that yielded the margin that we had in the fourth quarter.

Understood. Thanks.

Our next question comes from the line of Gary Bisbee with Bank of America. Please proceed with your question.

Hi, good afternoon. It didn’t feel the same without Dave bragging on the Patriots. But as a Giants fan, I have to say, didn’t mind not hearing it.

We’re just trying to cut everybody a break. I know it’s, sort of...

So, as I sit back and think about the pretty terrific growth you’ve driven in the six years since your second IPO, I guess I’ve been trying to spend some time thinking about how do we think about multiyear growth from here? Is it – would it be fair to project the broad outlines of the 2019 guidance as sustainable growth targets over the next few years? And by that I guess I’m thinking the eight to 10, revenue, the 50 to 100 bps of margin expansion and double-digit earnings growth is that reasonable? Or is given the scale of the company, is it just is it getting more difficult? I don’t know if there’s any if you want to give official updates or anything, you’d point out that we might think about over the next few years? Thanks.

Sure. So, I’ll start and I’m sure Elizabeth will play color as well. But the way I would start to answer that question is really around the opportunity that we see. And we continue to see really strong opportunity in all of the lines of service that we deliver on. So in terms of an expectation on the top line, I think it’s very fair to assume that we will continue to look at an 8% to 10% growth rate based on the fact that when we look at the white space within our existing client base as well as within those who are today not clients, we see terrific opportunities for building out additional centers, attracting more back-up clients and ed advisory clients. And then the use within each one of those three categories, we see is continuing to have a very positive trend line associated with it. And so maybe Elizabeth you want to cover up on the margin side?

Yes, I mean I do think that the 50 to 100 basis points, Gary, we would see as we continue to bed in a little bit of a tailwind with our lease model strategy adding call it 20, 25 basis points a year for the next couple of years still that’s really more of a mature series or cohorts and then seeing that operating margin ability to expand that in the range more like 25 to 50 or 75 basis points, so maybe a call it 2, 3-year horizon on the 50 to 100 and then tapering a bit. But the inherent structural elements of the model do offer modest opportunities for leverage when we are both vigilant about cost management, labor-intensive business, and then making smart investments that allow us to enable technology to support the service delivery in our back-up and ed advising in a more effective way and in a more user conscious way. Those things were both costless and be a better experience for the end-user. So, I think there’s a lot to execute to get that done. But I think that, our view is we do have some inherent business model elements that allow for ongoing leverage. And so, as you say, a conversion of top line growth at a faster pace so in the double-digit range certainly probably lower double-digits but that is sustainable.

Okay. And one of the keys obviously to margins historically has been the ability to price in excess of labor cost inflation that you’re paying out. I’ve always thought it’s dangerous to think long term 3% to 5% every year for as many years as you’ve done it. Is there anything – does that become more difficult to get at some point? Or do you feel like where you are relative to people’s ability to pay and relative to the market continues to remain in a compelling level such that you could continue to pass on this price over several more years?

Yes. I think that the it’s important to keep it at the structure where there’s a bit of GAAP and we target 1% GAAP at lease room for some variability. But to have a GAAP whether the wage rates are going up at 3% or 2% and flexing according to that not getting ahead of ourselves on how much we will price. But I think that, we’ve got a long track record of having the ability to price in a way that we have and to be transparent with parents and to have a service that they are able to afford, because of other both what they’re earning and/or the employer support to it. So, it’s something, we pay a lot of attention to. Again, don’t want to sound either complacent about it, or that it doesn’t get a lot of focus, but we are geographic – location-by-location making pricing determinations and adjusting according to that market and the demand profile. So, I think that there’s a long-winded way of saying we think we can sustain price increases, and to absorb the kinds of cost increases that we’ve seen over the last couple of years with wage rates both modestly ticking-up a bit faster than they had been and the movement behind minimum wages in certain locations where we’ve always had reasonable visibility there and stayed ahead of that pricing.

And then just one last one, if I could on the lease/consortium. Good to see them contributing or the drag no longer there from margins. Does the contributing in 2018 does that mean that the gross margins for that business are now above the corporate average? Or does that just mean that the drag is less in some way? And I guess, I’m trying to think of yes, go ahead.

It’s more that the drag if the drag is less, I mean, as a cohort they’re still in the high single-digits to low double-digits and that’s the range of where they would be as a cohort. So, they’re still not contributing at the overall rate of the full-service segment. But they are not absorbing more losses. So it’s becoming a positive and so that’s why there is a little bit more runway there Gary for there to be an extra 20, 25 basis points from the lease/consortium through the next couple of years as they continue to I think you may have been the person who asked us a couple of years ago, but what level how many years of this would you have and do you got a mature cohort? But we’re 6 years in another 3 years, 4 years while 10 years of these centers only two to three years that are not mature that’s when we would really consider to be at a sort of a just rolling level. And so, I’m going on too long, I mean with answers, but that’s the gist of it. We see a little bit of continued opportunity there.

Great. Thank you very much.

Yes.

Our next question comes from the line of Jeff Meuler with Baird. Please proceed with your question.

Yes. Thank you. Good afternoon. The My Family Care acquisition, does that have a sizable backup component to it? And can you just refresh us on our backup business in the UK and I guess the Netherlands if it’s applicable?

Yes. Good afternoon, Jeff. Thank you for the question. So, we did acquire recently the My Family Care in the UK and their focus and their business really is in the backup segment. And so, if we take a step back and why that was an important acquisition for us. We believe, we’re in the really early innings of the backup opportunity in the UK and our backup opportunity outside the U.S. today is the UK and they were very focused on the UK as well. So as one of our main competitors, I think, from an opportunity perspective, it’s a really nice pickup for us. A few things that we think make it particularly attractive: One is it came along with obviously economics. Again, both our business in the UK as well as their business, is relatively small. So, I would characterize it no different from a tuck-in acquisition that we might do on the center side. That’s sort of the scale that we’re talking about. On the other hand, it came along with some important client partnerships. It came along with some solid technology. And I think lastly, but quite importantly, it came along with some really high-quality people that have been dedicated to the backup space, similar to us, for a number of years now. And so, we see the combination of our backup business and My Family Care’s backup business as a really good platform to continue to accelerate the momentum in that UK market for backup care. In the Netherlands we don’t have a backup care business. In fact, there is no market, in today’s economy there, for backup. So, this is really about UK opportunity.

Thank you for that. And then, I hear you on the branding and branding all of the services around Bright Horizons. Any other initiatives change in sales force change in compensation to get after the big opportunity of cross-selling to take it well beyond the, I guess, 250 clients?

Yes. So, I think we’re really staying the course there. We made some sort of fundamental structural changes over the last 18 months and believe now we’re well positioned to go after that opportunity. As I’ve shared on previous calls, things that we have implemented are one that the sales folks are really partnering with our account management team to go after our existing client base. We created a small enterprise team that is focused on some of the more complex large opportunities. So again, I think we have done some really good things around the team itself. And then as you rightly mentioned, I think we have now aligned our incentives, so that our teams are really focused on not only bringing new clients into the family, but also making sure that we are really going after the opportunity that exists within our existing client base.

Okay. Thank you. And then just last one. So, what is the outlook, intermediate long-term now on the back-up care margins? And I guess, I’m just – it seemed like the messaging was, hey, we have really good margins in that business, it’s very economic to us, it’s a growth business. The growth is still there, but it sounds like maybe you’re starting to see some of the pay-offs on the investments and structurally they could improve the margins of the business. So, is there going to be reinvestment and should we still think of back-up care as a fuller margin story or are you seeing an inflection following those investments and should it – would you expect it to be a business with margin expansion over a multi-year horizon?

Well, I think our view on back-up is as it continues to mature, of course, there’s a number of factors that go into the overall – the mix of where we are providing care, the mix of clients who are capitated and sort of buying a basket of uses versus pre-use. And so there’s some elements of that that will evolve over time. We think that the margin for this full-year, so in Q4 it was over 30%, for the full-year of 2018, it was in the high-20s percent. And we would expect that being able to stay in that range and maybe tick up modestly toward the 30% range is possible. With the efficiencies that come with these we will continue to invest, but the efficiencies should come through. But I do think that at a 30% level and with the clients that we’re working with that will be a reasonable target for us to sustain in that level rather than a much leverage beyond that, Jeff.

Got it. Thank you.

Thanks, Jeff.

[Operator Instructions] Our next question comes from the line of George Tong with Goldman Sachs. Please proceed with your question.

You have Brian on for George today. Thanks for taking my questions. You mentioned that you plan to organically add 50 [ph] new centers in 2019. Can you talk about how the pace of new openings compared with earlier periods taking into account competitive dynamics, industry penetration and customer spending intentions?

Yes, I mean it’s a fairly consistent expectation. The mix of those centers we would expect to be in the 12 to 15 would be lease consortium models that we are citing and another 15 to 20 would be client centers. So, what we’re seeing is continued interest from the industries that we’ve seen good penetration in the healthcare, pharmaceuticals. The tech sector has been a bit more active the last couple of years and that we would continue to see colleges, universities as new clients and expanding their footprint. So, from a client spending standpoint this tends to be a fairly long decision cadence. We haven’t really seen a different pace just a steady pace from clients on the spending side. Hence, they’re relatively similar level of new centers that we’d expect to open.

Great. Thanks. And then for my last question, can you discuss how enrollment and pricing trends have been performing in light of tightening labor market and later cycle economic environment?

Yes. So, we – as we had anticipated for 2018, we saw about 1% enrollment gain in our mature centers. And then we of course have ramping centers that contribute as well, but pretty solid enrollment in the mature base. With our labor rates – as I mentioned before the labor has been seen a little bit firmer wage increase. We do wage increases every year. It’s not a new thing, but we’re seeing wages climbing more like to 2.5% to 3% on average. And in some cases where there are markets that are having – Seattle for example had put in a Minimum Wage Law several years ago that has been introduced over the course of many years in that environment. Over the last couple of years, we’ve seen wages climbing a bit faster. We pay above minimum wage, but it still has an effect on all kinds of companies like ours that are working with workforce that’s competing against some of the minimum wage jobs. So in that way we are seeing again staying ahead of the labor rates, but probably 2.5% to 3% on average.

Great. Thank you.

You’re welcome.

Our next question comes from the line of Hamzah Mazari with Macquarie. Please proceed with your question.

Hey, this is Mario Cortellacci filling in for Hamzah. I know you guys already touched on the work that you’re kind of doing in order to cross-sell and increase the number of subscription you have from clients. But I guess, you guys are around like that 21%, 22% range right now. And just wanted to see if you think that 2019, we could see that accelerate or even over the longer term, how big do you think that number could be realistically?

Yes, so the way we look at it is, we obviously look at our existing client base and have very strong relationships with those clients. We have an understanding as it relates to what services the particular clients would benefit from. So, we really do a bottoms-up analysis to figure out client-by-client what services their – them as an employer and their employees would benefit from. And then obviously we try to introduce those services to them in an appropriate way. So, I think the hardest part about seeing the percentage move up is that, we continue to see that many new clients to the Bright Horizons Family come into our organization investing in a single service. And so we continue to grow the number of single service clients, while at the same time, we continue to increase the number of cross-sells that ultimately add additional services to existing clients. So, what we’re really focused on is less about the percentage although that will tick up naturally over time and really focused on the number of clients who are investing in multiple services. And we’ve seen really nice progress as it relates to the numbers of our clients that are investing in multiple services.

Got it. Okay. And just one more, could you maybe talk about your M&A pipeline internationally whether markets like France or Australia or even certain Asian countries are attractive and whether there are platforms – or platform deals you could do in those regions?

Absolutely, it’s a great question and the quick answer is yes. So, we continue to monitor where we think we could add value by operating in a particular country. When we think about countries that are most appropriate for our expansion plans, we’re really looking for those countries that have some source of third-party financial support for child care. And so that can come in the form of government as it is in the place like the Netherlands or it can come in the form of employers like we have here in the United States. And so there are many countries throughout Europe, as well as in Asia and as you mentioned Australia, where one or both of those two possibilities exist. So again, we try not to speculate which country will necessarily be next. On the other hand, we continue to look for ways to keep good relationships with platform as you call them opportunities throughout the world. And there are a number of those in each of the countries that we are evaluating and so we continue to keep great relationships. And at the point where they’re ready to sell and/or it makes sense for us to go to a particular place, we’ll be on the ready. And I think as we demonstrated from the experience in the Netherlands, we have the ability to go in with a platform-type acquisition and then grow both organically and through additional acquisition to create quite a presence in a market.

Great. Thank you so much.

Thank you.

You’re welcome.

Our next question comes from the line of Jeff Silber with BMO Capital Markets. Please proceed with your question.

Thanks so much. Wanted to focus actually on your first quarter guidance. I know it’s the first time you’ve given it and it seems like consensus was a little bit ahead of your guidance or maybe we got out over our skis a little bit. You called out FX pressure, I’m just wondering if there’s anything specifically going on, did you have any impact from the government shutdown et cetera?

We really didn’t have much effect. We do run centers for a number of government agencies, Jeff, and had I think one or two centers that had – just one center had to close. Others had funding elsewhere that they were able to continue to stay open during the shutdown and serve families, so not an impact from the government shutdown in the first quarter. I think it’s mostly a comp versus – I mean, FX is certainly a factor and a comp against what had been a first quarter that had not only high foreign exchange in relation to this year, but it was high in relation to the year before that. Otherwise, we feel really good about the overall components sort of the same full-service growth components would play in, in the first quarter and we’ve just had solid back-up new client launches and we feel good about the kick-off to the year there too. So, nothing else to call out in terms of unexpected cost that were heavy.

Okay, that’s helpful. And as my follow-up, I know we talked a little bit about wage inflation before. I’m just curious just focusing on your center staff, considering what’s going on in the labor markets, are you seeing higher than normal turnover or having difficulty finding people?

Yes. So, one of the key features of Bright Horizons as an organization is, we really are an employer of choice and we spend a tremendous amount of time and have over our 30-year history investing in our culture and investing in our people. And so we haven’t actually experienced any difference in the turnover rates. I think that once someone determines that this is the field that they want to be in, we like to think that they’re excited to be a practitioner within our organization and I think our turnover rates suggest that. And to put a fine point on it, our turnover rates at Bright Horizons are about half of the industry average and that’s been consistent. And in fact, in a market like the one we’re in, it’s actually a little bit less than half, because again I think we have real stability in our workforce and I think others are struggling in the way that you described.

Okay, great. That’s helpful. Thanks so much.

Thank you.

Thanks, Jeff.

Wonderful. Well, thank you again for joining us on the call. We appreciate the questions and the insights. So, wishing you all a good night and looking forward to seeing you out on the road.

Thanks everybody.

This concludes today’s conference. You may disconnect your lines at this time. Thank you for your participation.